President Xi Jinping is poised to announce Sydney as an official currency trading hub during his state visit next week, in a deal aimed at bringing down the cost of doing business with Australia's largest trading partner as China pushes for greater international influence for the renminbi.
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Along with the bilateral free trade agreement, which is still to be finalised, the designation of the clearing bank is among the major announcements expected for President Xi's official visit after his attendance at the G20 in Brisbane this weekend.
He will address Parliament in Canberra on Monday, and pay visits to Sydney and Tasmania. Travelling with Mr Xi will be eight provincial governors and senior business delegations to meet with the leaders of Australia's states and territories, mirroring the sizeable contingent that travelled with Tony Abbott – who is currently in Beijing for the APEC Leaders' Summit – on his first visit to China as Prime Minister in April.
With some final technical details being ironed out in meetings on Tuesday, it is understood either the Industrial and Commercial Bank of China or the Bank of China will be the yuan clearing bank, with ANZ a front-runner to be the Australian partner. The deal will likely see the two countries set up a currency swap line in the tens of billions of dollars, with China shifting from being a capital importer to now on the cusp of being a net capital exporter next year.
Hong Kong remains the main offshore market for the yuan, but other financial centres such as Singapore and London have been competing for yuan-denominated business.
"Australia now desperately needs equivalency … with Hong Kong and Singapore in particular, so that's key for us," one source close to the deal told Fairfax Media. "All the indications are that this will happen - it's part of [China's] overall strategy and it suits us as well."
Seeking to promote use of the renminbi, also known as the yuan, in global trade and investment in a bid to eventually make it a major reserve currency like the US dollar or euro, China in the past two years has appointed clearing banks in cities including Singapore, London, Paris, Frankfurt and Seoul. Canada and Qatar this week were announced as the first clearing houses in North America and the Middle East respectively.
According to Westpac senior international economist Huw McKay, 18 per cent of China's trade is now denominated in yuan. This is expected to rise to 30 per cent by next year. Westpac forecasts China's share of global foreign exchange transactions rise from 0.4 per cent in 2010 to 5 per cent in 2018, and 15 per cent by 2030.
Australian companies invoicing and settling in yuan can negotiate immediate discounts of 2 to 3 per cent, as Chinese suppliers remove the margin in their prices for the foreign exchange risk, according to Mr McKay.
The announcement of a Chinese clearing bank could also likely enable fund managers to directly market to Chinese investors, in line with arrangements with other offshore trading hubs.
